One of the great innovations in financial stability policy worldwide over the past decade or so has been the development of an international standard approach to resolution policy for banks of systemic importance.  Through its active participation in international bodies such as the Financial Stability Board, the Bank of England was a central player in the elaboration of this idea, which has broad international acceptance, and indeed is being extended to central counterparties, insurance and beyond.  An increasing number of bank resolution authorities around the world have begun to prepare resolution plans for their leading banks.  Preparedness is uneven, though, and for large internationally active banks it is evident that, however good the resolution plan is ex ante, activating it will involve considerable financial, legal and diplomatic skills.

Author: Patrick Honohan

Published: 4 September 2023

One of the great innovations in financial stability policy worldwide over the past decade or so has been the development of an international standard approach to resolution policy for banks of systemic importance.  Through its active participation in international bodies such as the Financial Stability Board, the Bank of England was a central player in the elaboration of this idea, which has broad international acceptance, and indeed is being extended to central counterparties, insurance and beyond.  An increasing number of bank resolution authorities around the world have begun to prepare resolution plans for their leading banks.  Preparedness is uneven, though, and for large internationally active banks it is evident that, however good the resolution plan is ex ante, activating it will involve considerable financial, legal and diplomatic skills.

Credit suisse logo

Credit Suisse by Alpha Photo, Flickr

Last year, Dave Ramsden, Deputy Governor for Markets and Banking, presenting the result of the Bank’s first resolvability assessment of the eight major UK banks covered by the policy, was able to report that “today a major UK bank could enter resolution safely: remaining open and continuing to provide vital banking services to the economy.” This seems promising, but the assessment was also hedged around with caveats.  Outstanding actions for most of the banks were identified, some of them merely “areas for further enhancement” others identified as “shortcomings”, as well as “a number of thematic areas where work is needed.”  Importantly, there are still decisions to be made about funding in resolution.

The Bank of England’s resolution powers were recently used in the case of Silicon Valley Bank’s UK subsidiary when it lost a quarter of its deposits in one day in March as its parent collapsed.  The powers helped expedite the bail-in of capital instrument and the sale of the rest of the bank to HSBC. But interestingly this was not the Bank’s first intention. Indeed, it announced on the Friday that resolution would not be needed and instead SVBUK would simply be put into insolvency—a solution which could have left 95 percent of the depositors waiting months for whatever they could recover from the insolvency.

Against the background of this sense of the resolution not being fully prepared, even for a small bank like SVBUK, it is a bit concerning to see that implementation of resolution in other countries has also not so far been working very well, even where official statements of assurance (like that of the Bank of England) have been made stating that resolution plans are ready to be activated.  Only a few banks have been resolved using the new tools, and most of these have been relatively simple cases, such as the Spanish bank Popular, which was sold en bloc to Santander in 2017 (for one euro, with equity and subordinated debt-holders bailed-in), or the Croatian and Slovenian subsidiaries of Russia’s Sberbank.  Some banks that should have been resolved using the new tools have been dealt with in a more old-fashioned manner. The most dramatic such case is that of Credit Suisse, a global systemically important bank (GSIB) for which a shotgun-marriage was arranged in March of this year with its fellow Swiss GSIB UBS.

The UBS takeover of Credit Suisse was accompanied by a large commitment of government guarantees and central bank liquidity extension that required the promulgation of emergency laws in Switzerland, as well as a controversial decision to apply an unorthodox priority of payments as between risk-bearing debt and equity holders.

It does seem that use of the authorities’ resolution powers would have offered a better solution in the case of Credit Suisse, but these powers were not invoked. For one thing, the horse-trading with the Credit Suisse Board of Directors about the price UBS would pay the shareholders would have been unnecessary.  And emergency legislation would not have been needed to override certain rights of the Credit Suisse shareholders.

Furthermore, the Swiss regulatory and resolution authority FINMA has insisted that the Swiss bail-in plan involving a carve out of systemically important Swiss services of Credit Suisse, and the orderly bail-in of the equity and subordinated debt, was ready to implement.  But Swiss authorities also stated that “in a context of global market stress it was doubtful that this option would have restored the necessary confidence.”  So what use, one wonders, is a resolution plan that is ready to implement but will not resolve matters?  One suspects that it is the complexities of the international activities of this large bank (especially in the UK and US) that led to authorities’ hesitation; perhaps, unlike the part of the plan relating to Swiss operations, this aspect was not as ready.

Admittedly, it is now clear that the Swiss authorities will not lose any money in the end from the guarantees and loans that they made to facilitate the UBS takeover, but they did put the Swiss taxpayer at risk.  Resolution was supposed to avoid all of that.  There should be no need for the taxpayer to assume the risk of losses from a failing bank simply to keep essential banking services operating.

Is there a danger that, in London, a similar ambivalence about the effectiveness of resolution would accompany the need to intervene a failing major UK bank?

Put another way: if Credit Suisse had been a UK bank at the same level of resolution preparedness as the UK eight major banks are, would the Bank of England have used resolution powers, or would it have shied away like the Swiss authorities, potentially putting the taxpayer at risk? Despite the UK ringfencing regime, it is possible to wonder about this.

Resolution planning can seem a thankless task, soaking up staff resources both at the Bank of England and the banks subject to the policy.  How much more thankless if it is never to be refined to the point where the Bank can be confident that it will be effective in restoring confidence and maintaining essential financial services when a major UK bank is failing or likely to fail?

Interestingly, resolution is not a task of the Bank of England’s Financial Policy Committee. Instead, resolution is a gubernatorial responsibility, likely to be a collective decision. It is important that all of the relevant sections of the Bank (prudential, regulatory and financial stability) pay continued attention to making sure that, if it’s needed, the planned resolution can be implemented safely and as the preferred option for every one of the major British banks. The Bank of England should also be prepared to help ensure that the UK side of the resolution of foreign-headquartered major banks works smoothly and in a manner that is consistent with the preferred approach of the lead resolution authority, whether single point of entry or multiple point of entry.  Indeed, the Bank is an enthusiastic participant in Crisis Management Groups and an advocate of simulation exercises to help prepare for cross-border resolutions.

Let’s face it.  A sizable number of observers privately express doubts about whether a major international bank will ever be resolved, whether in the European Banking Union, the US or elsewhere.  What a shame it would be if that proved to be the ultimate fate of such an ingenious and elaborate initiative that emanated, at least in part, from the Bank of England.